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Goldman Sachs: Don’t Expect Oil Prices To Rise On Historic Oil Deal

Even though oil producers finally agreed to cut production by nearly 10 million bpd, the deal will fail to support oil prices in the coming weeks as the agreement, albeit historic, is falling short of the enormous demand destruction and expectations, according to Goldman Sachs.

The voluntary cuts from the OPEC+ group will be too little to counter a nearly 20 million bpd demand loss this month and next, Goldman said on Sunday, as carried by Reuters.

The OPEC and non-OPEC producers known as OPEC+ who had managed their oil supply to prop up prices in the past three years put the Saudi-Russia feud behind and forged on Sunday a new collective deal to respond to U.S. pressure and to the glut threatening to fill up global storage within weeks as demand crashed in the COVID-19 pandemic.

After four days of talks and mediation, the OPEC+ countries decided to cut their overall crude oil production by 9.7 million bpd for two months—May and June, before gradually easing the cuts.

Still, while OPEC issued a timetable of cuts that would last through 2022, oil prices were barely up on at 7:50 a.m. EDT on Monday, with WTI Crude up 0.13% at $22.79, erasing earlier gains of 5% as the market seems to look at the deal as ‘too little, too late’ as global oil demand tumbles by 20-30 million bpd.

The global oil deal would translate into just 4.3 million bpd of actual production reduction from Q1 2020 levels, according to Goldman Sachs, assuming that all major OPEC members comply 100 percent and all other producers comply at 50 percent with the agreement.

“Ultimately, this simply reflects that no voluntary cuts could be large enough to offset the 19 million bpd average April-May demand loss due to the coronavirus,” Goldman Sachs said.

“[W]hile these cuts are significant, there is still a sizeable surplus expected over the second quarter. Therefore, we still believe that there is downside risk to oil prices from current levels in the short-term,” Warren Patterson, ING’s Head of Commodities Strategy, said on Monday.

Moreover, compliance with those new historic cuts will also be an issue, and Saudi Arabia—which has rescued the compliance rate in previous pacts—is unlikely to go the extra mile this time, considering the size of its cuts, Patterson noted.

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For months I have been repeatedly saying that any cuts no matter how big they are will hardly have a positive impact on prices while the coronavirus outbreak is raging.

How could a 10 million barrels a day (mbd) cut impact on a global oil market sagging under the weight of a glut estimated at 1.8 billion barrels (between global inventories and excess crude in the market) and a global demand decline estimated at 30 mbd with half the world’s population in quarantine.

So far none of the wise men of OPEC+ have so far provided a logical answer to my question. But the market did give its verdict on the OPEC+ deal by hardly registering any upward movement of oil prices.

However, there is one positive sign, namely China’s opening up after it successfully managed to control the coronavirus outbreak. China will be hugely thirsty for crude oil. This development alone will give a huge impetus to an oil market bereft of good news and may prevent oil prices from sliding downward and could also enable prices to stabilize at $30-$35 a barrel.

Meanwhile, it is far better for countries of the world to implement the strict measures that enabled China to control the outbreak and open the country to business again. This will certainly shorten the duration of the global lockdown and enable people to resume their normal activities including demand for crude oil rather than wasting their time making cuts which are futile in the current circumstances.

The cuts are not nearly enough if you believe the world's economies will be shut down for months to come. But when you see China already opening back up, and news reports about Trump reopening the United States back up on May 1rst, it seems likely oil consumption will return enough to prevent the dire full to the brim predictions. With everyone locked up for several weeks, people will be ready to take that postponed vacation, boosting oil consumption temporarily to higher than ever.

One thing is for certain, the price of oil will not stay below production cost for long, the hard reality of any business.

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